A man in Tokyo, Japan purchases fish from a market on March 3, 2023.
Tokyo, Japan – In June, Japan’s core inflation remained above the central bank’s target of 2 percent for the 15th consecutive month. However, an index that excludes the impact of energy costs showed a slowdown, indicating that the sustained pressure on prices driven by commodities may have peaked. Despite this, with the growth in service prices also slowing last month, policymakers may feel that wage pressures have not yet reached a level that warrants an immediate adjustment to the loose monetary policy.
While this data increases the likelihood that the Bank of Japan will upgrade its inflation forecast for this year next week, analysts suggest that it may relieve the pressure on the central bank to begin phasing out its extensive monetary stimulus in the near future. “Cost-push inflation is beginning to reach its peak. We are likely to see a slowdown in inflation in the coming months, allowing the BOJ to maintain its current policy for now,” said Toru Suehiro, chief economist at Daiwa Securities. “While service prices may rise next year, prices for goods will remain weak. Inflation could hover around 1 percent next year.”
The nationwide core consumer price index (CPI), excluding fresh food costs, increased by 3.3 percent in June compared to the previous year, in line with median market expectations, and higher than the 3.2-percent gain in May, according to Friday’s data.
READ: In June, Japan’s inflation re-accelerates and remains above BOJ target
The increase in utility bills, along with the steady rise in food and daily necessities prices, has increased the burden on households. However, an index that excludes both fresh food and fuel costs, which is closely monitored by the BOJ as a more accurate measure of underlying inflation, increased by 4.2 percent in June compared to the previous year, slightly slower than the 4.3-percent gain in May. This is the first slowdown since January 2022, indicating that the rapid pace of price increases seen in recent months, driven by numerous price hikes by businesses, is moderating.
Policymakers closely monitor service prices to determine whether inflation is driven more by higher labor costs. In June, service prices rose by 1.6 percent compared to the previous year, following a 1.7-percent gain in May.
This data comes ahead of the BOJ’s highly anticipated policy meeting on July 27-28, when the board will release updated quarterly projections and discuss Japan’s progress towards sustainably achieving its 2 percent inflation target.
READ: Japan’s government lowers growth forecast, predicts inflation will surpass BOJ target
Capital core inflation data for Japan, which will be released a few hours before the BOJ’s policy announcement on July 28, is also expected to show a significant slowdown in July, according to a Reuters poll. With inflation having exceeded the BOJ’s target for more than a year, there is speculation in the markets that the BOJ could start phasing out its controversial yield curve control (YCC) policy as early as next week. BOJ Governor Kazuo Ueda has emphasized the need to maintain an ultra-loose policy until cost-push inflation transitions into demand-driven inflation and higher wage growth.
READ: BOJ retains ultra-low rates, focus turns to Ueda’s views on inflation
The key factor will be whether companies continue to offer higher wages next year, as they have this year, and begin to pass on the increased labor costs to service prices. “If more companies raise wages and pass on the costs, service prices could exceed expectations,” said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute. “Inflation, excluding food and energy, is likely to moderate, but the pace of slowdown could be gradual.”
Under the YCC policy, the BOJ guides short-term interest rates to -0.1 percent and purchases large amounts of government bonds to keep the 10-year bond yield around 0 percent, as part of efforts to stimulate inflation to reach its 2 percent target.
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